Payroll Practices and Procedures Checklist

Author: Alice Gilman

When to Use

At the start of every calendar year, employers are responsible for closing out the prior year's payroll in compliance with all federal, state and local income and employment tax laws, regulations and procedures. They must also be ready to comply with any legal and procedural changes taking effect in the new year and ensure their payroll systems are updated.

To retain control and prevent the process from becoming overwhelming, an orderly and methodical plan of payroll practices and procedures should be mapped out and followed not only at the end and beginning of each year, but throughout the entire year.

Using the following checklist in every pay period and every month (in month order) will help an employer stay in control of payroll responsibilities all year long and easily tackle year-end and new-year challenges.

Year-End 2024 and 2025 Changes

The year-end process for 2024 and into 2025 continues to challenge employers, in part due to lingering effects of COVID-19.

FUTA Credit Reduction

In 2020, many states borrowed heavily from the US Department of Labor to pay unemployment benefits during the COVID-19 economic downturn. However, California and New York did not pay back their loans as required by November 10, 2024. Therefore, employers located in these states will have higher payroll costs, as their full 5.4% Federal Unemployment Tax Act (FUTA) credit will be reduced by 0.9% for 2024. The additional tax is due with the 2024 Form 940, which must be filed and paid by January 31, 2025 (or February 10, 2025, for employers that have deposited all FUTA taxes on time throughout the year).

Employee Retention Credit

Employers could continue to claim the COVID-19-related Employee Retention Credit (ERC) against wages paid and health benefits provided to qualified employees through September 30, 2021. Although the ERC expired on that date, employers reviewing their books now and realizing they either qualified for a tax credit they did not take, or that their tax credit calculations were incorrect, may still claim or adjust them by filing Form 941-X (for 2021 claims, by April 25, 2025).

However, the IRS identified pervasive fraud on Forms 941-X claiming the ERC. As a result, it imposed a moratorium on processing Forms 941-X on which the ERC is claimed and is only processing forms that were filed by January 31, 2024. Employers whose Forms 941-X have been flagged as suspicious will be asked by the IRS to substantiate their ERC claims. Employers can still file Form  941-X to claim the credit but they will have to wait longer for the IRS to process them. To prevent fraud, employers should work only with trusted third parties to complete Form 941-X and request a detailed worksheet from the third party that explains the employer's eligibility for the ERC and the computations used to determine the ERC amount.

Electronic Filing Threshold for Information Returns

The IRS issued final regulations that decreased the mandatory electronic filing threshold for information returns (e.g., Forms W-2, 1095, 1099) to a combined total of 10 or more returns (beginning with 2023 returns filed in 2024). These regulations also require employers to electronically file corrected returns (e.g., Forms W-2c) if they must electronically file their original returns.

Employers that have never filed Forms W-2 electronically before must first authenticate their identity by establishing accounts with Login.gov and then obtain credentials from the Social Security Administration (SSA) by registering with Business Services Online. The SSA will also accept identity authentication from ID.me and, for the time being, through a personal My Social Security account established before September 18, 2021.

Regardless of the electronic filing platform, new Form 1099 filers must first authenticate their identity by establishing an account with ID.me and then applying online for an electronic filing credential - a Transmitter Control Code (TCC). Also, to facilitate electronic filing of Forms 1099 by small employers that were never before subject to an electronic filing mandate, the IRS provides a simplified electronic filing platform for Forms 1099 - the Information Returns Intake System (IRIS). IRIS allows employers to key in information and generate the copies they must file and send to recipients. The platform also presents a comma-separated values (csv) template employers can use with spreadsheet programs. The IRS's older electronic filing platform is called the Filing Information Returns Electronically (FIRE) System.

To file Forms 1095, including Forms 1095-B, employers must obtain a separate TCC for the IRS's AIR system.

Since it takes some time for the SSA and the IRS registration processes to be completed, employers are advised to register in the Fall.